Druckenmiller to Shut Fund After 30 Years as Stress Takes Toll

Stan Druckenmiller said in August that he was closing his 30-year-old hedge-fund firm and returning client capital. Photographer: Joe Kohen/WireImage/Getty Images

Aug. 19 (Bloomberg) -- Hedge-fund icon Stanley
Druckenmiller is quitting the business after three decades,
telling investors he’d been worn down by the stress of trying to
maintain one of the best trading records in the industry while
managing an “enormous amount of capital.”

“For 30 years I’ve been responsible for managing client
money and it’s been a joy, but at some point I need to move
on,” Druckenmiller, who made $1 billion for George Soros by
forcing a devaluation of the British pound in 1992, said in a
two-hour interview on Aug. 17. “Thirty years is enough.”

Druckenmiller, 57, said he’s frustrated by his failure in
the past three years to match returns that had averaged 30
percent annually since 1986. His Duquesne Capital Management
LLC, which oversees $12 billion and has never had a losing year,
is down 5 percent in 2010.

“You may remember that I chose to leave Soros Fund
Management 10 years ago because the challenge of managing an
enormous amount of capital was having a clear impact on my
ability to perform, as well as my state of being,”
Druckenmiller wrote to his 100 clients yesterday.
“Unfortunately, as Duquesne has grown, these factors have again
emerged.”

Druckenmiller built his reputation making large bets on
macroeconomic themes that he spotted before others, a skill he
shares with legendary traders including Bruce Kovner, Michael
Steinhardt and Soros, the Hungarian-born billionaire and his
former boss. The decision to shut Duquesne suggests that in an
era in which the biggest hedge funds oversee $30 billion and are
adding even more assets, they may no longer be able to routinely
outperform conventional funds by wide margins.

Missed Opportunities

Duquesne returned about 11 percent in 2008, when hedge
funds on average lost a record 19 percent, and rose about 10
percent in 2009, when the average gain was 20 percent.

“I felt I missed a lot of opportunities in 2008 and 2009,
and a huge move in bonds this year,” he said during the
interview in his New York office on 57th Street overlooking
Central Park. In the past three years, his returns have trailed
those of the 10 portfolio managers who manage about half of
Duquesne’s capital -- a first.

Rising assets are “an issue for the largest hedge funds,”
said Don Steinbrugge, chairman of Agecroft Partners LLC, a
Richmond, Virginia-based consulting and marketing firm for hedge
funds. “A lot of these hedge funds have too much money. Their
skill set is being diluted over a very large asset base.”

Druckenmiller said he’s been thinking about retiring since
he left Soros Fund Management LLC 10 years ago. He became
serious about the idea three or four weeks ago, when Johann
Rupert, a friend and chief executive officer of Cie. Financiere
Richemont SA, the world’s largest jewelry maker, invited him to
play in October at the Alfred Dunhill Links Championship in
Scotland, a golf tournament in which both professionals and
amateurs compete.

‘Are You Crazy?’

Druckenmiller declined, saying he couldn’t leave the
office, given the history of volatile markets in October.

“Are you crazy?” was Rupert’s reply, according to
Druckenmiller. “You’ve been doing this for 30 years. You are a
billionaire. You can’t take a couple of days off to play golf?”

“I’d had that same thought a hundred times,”
Druckenmiller said. He said almost every family vacation had
been interrupted by a work emergency.

Druckenmiller will create a family office overseeing some
of his fortune, estimated at $2.8 billion by Forbes magazine,
when he winds down the firm and returns money to clients
sometime in 2011.

“I plan on managing a decent chunk of my money, but only
an amount that will be fun,” he said. He will invest with
Duquesne portfolio managers who are planning to open their own
hedge fund.

Slow Growth Seen

Druckenmiller, an established philanthropist, said he
intends to spend more time with his family and friends, play
golf during the week and work on his charitable pursuits,
including Harlem Children’s Zone, a New York charity he chairs
and to which he’s given more than $25 million. He’ll also
continue to follow the Pittsburgh Steelers, the National
Football League team he tried unsuccessfully to buy in 2008.

While financial markets have been volatile, he said that’s
not the reason he’s closing his firm.

“I’ve been through difficult markets before, and I’ve
always been able to meet my standard” for investment returns,
he said. While Druckenmiller doesn’t expect the U.S. to slip
back into recession, he sees growth remaining weak as banks lend
less and companies hold back on hiring and capital expenditures.

He’s concerned that with interest rates near zero, neither
the government nor consumers will pay down their debts.

“We are setting ourselves up for a much worse problem if
we don’t deleverage,” he said.

Double Duty

Druckenmiller has run Duquesne since 1980, even while
working for two other organizations, mutual-fund manager Dreyfus
Corp., from 1986 to 1988, and Soros Fund Management, where he
was chief strategist from late 1988 to 2000. Both Soros and
Dreyfus Chairman Howard Stein wanted Druckenmiller badly enough
to let him continue managing his own fund.

He made some of his biggest trades working with Soros,
including one that cemented Soros’s reputation as a preeminent
speculator: A $10 billion bet in September 1992 that the Bank of
England would be forced to devalue the pound.

Breaking the Bank

By August of that year, Druckenmiller said he had initiated
a $1.5 billion trade that would profit if the German mark rose
versus sterling. He expected Europe’s exchange-rate mechanism,
in which the currencies moved against each other within a
limited band, to come under pressure as Germany raised interest
rates to prevent inflation after reunification. Germany’s move
forced the United Kingdom and other members of the ERM to decide
whether to increase rates, which could damage their already
troubled economies, or devalue their currencies and fall out of
the ERM.

Druckenmiller said he calculated that the Bank of England
didn’t have enough reserves to prop up the currency, and it
couldn’t afford to raise rates. He was right, and selling by the
Soros fund is credited with pushing the pound out of the ERM.

“He was so proud because until that point Soros had never
made $1 billion on a bet,” said Roger Entress, a Pittsburgh
surgeon and early Duquesne investor, who was golfing with
Druckenmiller at the National Golf Links of America in
Southampton, New York, the weekend before the devaluation.

It turned out to be a big year for Druckenmiller. He said
he made another $1 billion a few months later betting on a
decline in the Swedish krona. There were additional profits from
trades tied to the ERM unraveling, including a bet that British
stocks would rise thanks to lower interest rates, and European
bonds would jump in price.

Fierce Competitor

Druckenmiller’s friends say the money isn’t the reason he’s
continued to trade long after becoming wealthy.

“It’s about winning -- he’s a fierce competitor,” said
Kenneth Langone, 75, a co-founder of Home Depot Inc. and an
early Duquesne investor who calls Druckenmiller one of his
closest friends.

Druckenmiller is a so-called macro trader who seeks to
profit from broad economic trends by trading stocks, bonds,
currencies and commodities around the world. It’s a strategy
pursued by some of the longest-standing and best-performing
managers in the $1.65 trillion industry. Kovner, founder of
Caxton Associates LLC, Tudor Investment Corp.’s Paul Jones and
Louis Bacon, who runs Moore Capital Management LP, have all been
in the business for more than 20 years and have produced average
annual returns exceeding 20 percent.

Getting It Wrong

Druckenmiller has been able to outpace them over so many
years in part because of a lesson driven home by Soros: When
you’re sure you’re right, no trade is too big. And the bigger
your gains in a year, the more aggressive you can be.

“It takes courage to be a pig,” is Druckenmiller’s motto,
and he has a yellow porcelain pig named Jerome on his desk to
remind him.

He’s also quick to change his mind when he’s wrong.
Druckenmiller said he reversed a bet that U.S. stocks would fall
the Friday before the Oct. 19, 1987, stock market crash,
thinking that the week’s 9 percent decline in the Dow Jones
Industrial Average had been overdone. Over the weekend, after
studying trading charts and talking to Jack Dreyfus, who founded
the Dreyfus mutual funds where Druckenmiller was then working,
he knew he was wrong, Druckenmiller said.

On the following Monday morning, he took advantage of a
brief rally to sell his holdings. The Dow lost more than 22
percent that day and 13 percent for the week. He finished the
week with a profit.

Druckenmiller said his success is in part due to lessons he
learned from his mentor at his first job at Pittsburgh National
Bank, Speros Drelles.

The Investing Game

Drelles taught him to use technical analysis to help gauge
whether prices were poised to jump, while most analysts depended
on a company’s financial reports to decide whether a stock was a
good buy. If a company has good charts and fundamentals, he’d
put it in the portfolio. His training as an economist also
helped him identify big macro themes, such as housing starts,
retail spending and unemployment that would cause shares to
climb or swoon.

“I’ve always loved to play games, and face it, investing
is one big game,” he said. “You need to be decisive, open-minded, flexible and competitive.”

Druckenmiller, who says his mother-in-law calls him an
idiot savant, said intelligence is necessary, though only to a
certain level. He said it’s a waste of resources that people who
might have pursued careers in science or engineering have
flocked to Wall Street instead in the past two decades.

“You need to have a certain amount of intelligence, but
it’s wasted over a certain level,” he said. “After that it’s
more about intuition.”

7 Handicap

Druckenmiller’s drive to win extends to every contest he
enters, be it horseshoes, bocci or golf, which he’s played since
he was a child. He has a lower-than-average 7 handicap.

On the golf course, his sense of humor and his love of
winning are always apparent, said Doc Hedreen, a friend and
longtime investor. Hedreen recalls a recent game in which Druck,
as his friends call him, hit a powerful drive of 300 yards.

“It was a toe shot,” said Druckenmiller, who stands six-feet, five inches (1.9 meters), using the term for a badly hit
ball, in an effort to psyche out his friend by suggesting the
drive could have been even longer.

Druckenmiller studied English and economics at Bowdoin
College in Brunswick, Maine, where he earned money playing
poker, as well as running a hot dog stand with fellow student
Larry Lindsey, who later became a Federal Reserve governor. He
briefly operated a casino at a fraternity house.

No Academic

After graduating in 1975, he entered a doctorate program in
economics at the University of Michigan, hoping to become an
academic. He quit in his second semester, finding the courses
too theoretical.

He took a job at Pittsburgh National Bank as an equity
analyst and quickly was promoted to chief of research and then,
at age 26, head of investments. In 1980, after the head of a New
York securities firm offered Druckenmiller $10,000 a month to
give him advice, he opened Duquesne with $1 million in separate
client accounts, a secretary and an analyst from the bank. When
that securities executive ended up in prison a few years later,
and Druckenmiller’s monthly stipend vanished, Entress let him
live in an apartment he owned rent free.

In 1986, Druckenmiller, strapped for cash, was lured by
Stein to Dreyfus, where he ran the country’s top-ranked mutual
fund. That same year, he borrowed $75,000 from a friend to start
a formal hedge fund, meaning it charged 1 percent of assets and
20 percent of any profit he made.

Soros Showdown

Soros recruited him near the end of 1988. He thought he’d
be fired after a year given the mercurial nature of his new
boss, and thought of it as the finishing touches on his
investing education. Within the first six months, Soros had sold
one of his bond positions when Druckenmiller was out of the
office, and the younger man called Soros swearing and
threatening to quit. Soros promised he’d leave the management of
the fund to Druckenmiller and moved to London.

“Now we’ll find out whether I’ve just been in your hair
too much or whether you really are inept,” Druckenmiller
recounts Soros as saying.

Left alone, Druckenmiller made money, and the collaboration
lasted until April 2000. In the first four months of that year,
the $9 billion Quantum Fund had lost 22 percent on a wrong-way
bet on technology shares, and Druckenmiller decided he’d had
enough, having climbed out of a similarly sized hole the
previous year to end up 35 percent. He made $3 billion on his
technology bets in 1999 and 2000.

Philanthropic Causes

At that time, he said one reason he wanted to leave Soros
was the firm, at $22 billion, was managing too much money.
Duquesne had $2 billion then.

Druckenmiller said he will continue to focus on
philanthropy. Last year he and his wife Fiona, a former Dreyfus
fund manager, gave $100 million to the New York University
Langone Medical Center to establish a neuroscience center. He’s
contributed at least $30 million to Bowdoin since 1991, and
manages its endowment for free.

His biggest cause has been Harlem Children’s Zone, an
organization run by fellow Bowdoin graduate Geoffrey Canada,
which aims to eradicate poverty in a 100-block area of the New
York neighborhood by providing education, health care and job
training to the community.

President Barack Obama has called for the creation of
“Promise Neighborhoods” across the country based on the HCZ
model.

“It’s not just the direct giving,” said Canada, who talks
to Druckenmiller almost every day and sees him in Harlem once a
week. “He’s a no-nonsense guy and he brings a real discipline.
We’ve built this organization together.”

Asked whether he expects other hedge-fund managers in their
fifties to follow him into early retirement, Druckenmiller said
it’s harder for those with bigger firms to disband.